Many tech stocks tumbled this year as investors fretted over rising bond yields, inflation rates, frothy valuations, and tough post-pandemic comparisons for companies that benefited from stay-at-home measures. But one tech stock that weathered that storm was cloud storage provider Dropbox (DBX 0.62%).
Dropbox's stock has risen about 20% this year, but it still looks cheap at 18 times forward earnings. It's also trading above its IPO price of $21 again, after sliding below it in the final few months of 2020. Let's see why Dropbox's stock finally firmed up, and whether or not it's still a worthy investment today.
Image source: Getty Images.
Reviewing the key numbers
Dropbox's free users get 2GB of cloud storage. Individual users can get 2TB of storage for $9.99 per month, or split 2TB with up to five other users in family plans that cost $16.99 per month. Dropbox also provides various enterprise plans that start at $12.50 per user per month.
Each paid tier adds more perks, including camera uploads, offline folders, text searches, document scanning tools, and support for e-signatures. Demand for Dropbox's services continued to climb throughout the pandemic, as seen in its stable growth in revenue, paying users, and average revenue per paying user (ARPPU). Its gross and operating margins have also continued to expand.
|
Metric |
Q1 2020 |
Q2 2020 |
Q3 2020 |
Q4 2020 |
Q1 2021 |
|---|---|---|---|---|---|
|
Revenue growth (YOY) |
18% |
16% |
14% |
13% |
12% |
|
Paying users (millions) |
14.6 |
15.0 |
15.3 |
15.5 |
15.8 |
|
ARPPU |
$126.30 |
$126.88 |
$128.03 |
$130.17 |
$132.55 |
|
Gross margin |
78.3% |
79.2% |
80% |
80.1% |
80.2% |
|
Operating margin |
16.1% |
20.6% |
23% |
25.3% |
29.1% |
Data source: Dropbox. YOY = year over year. Non-GAAP margins.
Those growth rates indicate Dropbox isn't falling behind its biggest competitors, which include Box (BOX +0.77%) and tech giants like Microsoft (MSFT 1.57%), Alphabet's (GOOG 0.56%) (GOOGL 0.42%) Google, and Amazon (AMZN 0.87%).
To differentiate itself in this crowded market, Dropbox acquired the e-signature start-up HelloSign in 2019 and the secure document sharing company DocSend earlier this year. It believes integrating those services will enable it to create an "end-to-end suite of secure, self-serve products for content collaboration, sharing, and e-signature."
During Dropbox's latest conference call, CEO Drew Houston noted there was rising demand for those "seamless" collaboration services among freelancers and small-to-medium businesses, and declared "there's never been a better time in history to be building collaboration software."
A stable outlook for the future
Dropbox expects its revenue to rise about 11% this year. It expects half of that growth to be organic, and the remaining half to come from its recent takeover of DocSend. It noted its number of paying users and ARPPU could experience short-term "variability" due to its promotion of family plans and an intentional shift away from bigger enterprise customers that pay less money per user.
Therefore, Dropbox believes its ARR (annual recurring revenue), which rose 13% year over year to $2.1 billion in the first quarter, will be a better measure of its success this year than its growth in paid users and ARPPU. Analysts expect its revenue to rise 11% this year, followed by 9% growth next year.
Dropbox expects its non-GAAP operating margin to expand from 21.4% in 2020 to 27%-28% in 2021. It plans to offset the impact of the DocSend acquisition in the first half of the year by shifting some of its planned marketing initiatives back toward the second half. Looking further ahead, it expects its adjusted annual operating margin to remain between 28% and 30%.
Dropbox plans to generate $670 million to $690 million in free cash flow for the full year, which would represent 37%-41% growth from 2020. It also reiterated its long-term goal of generating $1 billion in annual free cash flow by 2024, which could give it plenty of room for more ecosystem-expanding acquisitions.
Analysts expect Dropbox's adjusted earnings to grow 46% this year, thanks to its boost from DocSend, and increase another 12% next year. Those forecasts indicate its stock is still cheap relative to its growth.
The tortoise proves the critics wrong
Dropbox is growing at a slower rate than many other cloud service stocks, but its core metrics continue to improve as it expands its cloud storage service into an end-to-end collaboration platform.
Both Dropbox and Box will likely continue to attract individual users and businesses that don't want to be tethered to Microsoft, Amazon, or Google's services. The bears who claim that Dropbox and Box will be crushed by those tech giants often ignore that niche appeal.
Dropbox's insiders have also bought twice as many shares as they sold over the past six months. There's also been some buzz of activist interest in the stock, which remains a dependable tortoise in a market full of hares. Therefore, I believe Dropbox will remain one of the few tech stocks that can outperform the market this year as investors rotate from growth to value stocks.
